4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

		September 30, 2015 (1)				December 31, 2014
Real estate:
Land		$	93,265			$	88,394
Building and improvements			620,794				593,155
Tenant improvements			47,399				41,016
Accumulated depreciation			(104,877	)			(92,133	)
Real estate, net		$	656,581			$	630,432

 

(1)	Does not include real estate held for sale as of September 30, 2015.

Real estate depreciation expense on the building and tenant improvement assets were $5.7 million and $16.4 million for the three and nine months ended September 30, 2015, respectively, and $4.9 million and $13.8 million for the three and nine months ended September 30, 2014, respectively.

2015 Real Estate Activity

During the nine months ended September 30, 2015, we acquired five properties, which are summarized below (dollars in thousands):

 

Location		Acquisition Date				Square Footage (unaudited)				Lease Term		Renewal Options		Total Purchase Price				Acquisition Expenses				Annualized GAAP Rent				Debt Issued
Richardson, TX (1)			3/6/2015				155,984			9.5 Years		2 (5 years each)		$	24,700			$	108			$	2,708			$	14,573
Birmingham, AL			3/20/2015				30,850			8.5 Years		1 (5 years)			3,648				76				333				N/A
Columbus, OH			5/28/2015				78,033			15.0 Years		2 (5 years each)			7,700				72				637				4,466
Salt Lake City, UT (1)			5/29/2015				86,409			6.5 Years		1 (5 years)			22,200				149				2,411				13,000
Atlanta, GA (2)			7/15/2015				78,151			Multiple (2)		2 (5 years)			13,000				109				1,291				7,540
Total							429,427							$	71,248			$	514			$	7,380			$	39,579

 

(1)	The tenant occupying this property is subject to a gross lease.

(2)	This building is 100% leased to one tenant through two leases. 30% of this space is leased for 15 years, while the remaining space is leased for 7 years.

 

 

In accordance with Accounting Standards Codification, or ASC, 805, “Business Combinations,” we determined the fair value of the acquired assets related to the five properties acquired during the nine months ended September 30, 2015, as follows (dollars in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Above Market Leases				Below Market Leases				Total Purchase Price
Richardson, TX		$	2,709			$	12,503			$	2,761			$	2,046			$	1,791			$	1,915			$	975			$	—			$	24,700
Birmingham, AL			650				1,683				351				458				146				360				—				—				3,648
Columbus, OH			1,338				3,511				1,547				1,144				672				567				—				(1,079	)			7,700
Salt Lake City, UT			3,248				11,861				1,268				2,396				981				1,678				821				(53	)			22,200
Atlanta, GA			2,271				7,862				916				750				548				723				44				(114	)			13,000
		$	10,216			$	37,420			$	6,843			$	6,794			$	4,138			$	5,243			$	1,840			$	(1,246	)		$	71,248

Below is a summary of the total revenue and earnings recognized on the five properties acquired during the nine months ended September 30, 2015 (dollars in thousands):

 

						For the three months ended September 30,								For the nine months ended September 30,
						2015								2015
Location		Acquisition Date				Rental Revenue				Earnings (1)				Rental Revenue				Earnings (1)
Richardson, TX			3/6/2015			$	656			$	96			$	1,496			$	423
Birmingham, AL			3/20/2015				83				(22	)			177				84
Columbus, OH			5/28/2015				177				18				244				166
Salt Lake City, UT			5/29/2015				572				163				780				441
Atlanta, GA			7/15/2015				274				214				274				214
						$	1,762			$	469			$	2,971			$	1,328

 

(1)	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

Pro Forma

The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the three and nine months ended September 30, 2015 and the twelve months ended December 31, 2014, respectively were acquired as of January 1, 2014. The pro-forma earnings for the three and nine months ended September 30, 2015 and 2014 were adjusted to assume that acquisition-related costs were incurred as of the previous period (dollars in thousands, except per share amounts):

 

		For the three months ended September 30, (unaudited)								For the nine months ended September 30, (unaudited)
		2015				2014				2015				2014
Operating Data:
Total operating revenue		$	21,402			$	21,624			$	64,059			$	65,425
Total operating expenses			(13,539	)			(13,222	)			(38,651	)			(53,311	)
Other expenses			(7,820	)			(8,029	)			(23,485	)			(23,120	)(1)
Net income (loss)			43				373				1,923				(11,006	)
Dividends attributable to preferred and senior common stock			(1,286	)			(1,160	)			(3,818	)			(3,417	)
Net loss attributable to common stockholders		$	(1,243	)		$	(787	)		$	(1,895	)		$	(14,423	)
Share and Per Share Data:
Basic (loss) earnings per share of common stock - pro forma		$	(0.06	)		$	(0.04	)		$	(0.09	)		$	(0.86	)
Diluted (loss) earnings per share of common stock - pro forma		$	(0.06	)		$	(0.04	)		$	(0.09	)		$	(0.86	)
Basic (loss) earnings per share of common stock - actual		$	(0.06	)		$	(0.05	)		$	(0.13	)		$	(0.93	)
Diluted (loss) earnings per share of common stock - actual		$	(0.06	)		$	(0.05	)		$	(0.13	)		$	(0.93	)
Weighted average shares outstanding-basic			21,403,808				17,739,084				20,820,559				16,685,162
Weighted average shares outstanding-diluted			21,403,808				17,739,084				20,820,559				16,685,162

 

(1)	$14.0 million of other expenses relates to the impairment charge recorded in operating expenses during the nine months ended September 30, 2014.

Significant Real Estate Activity on Existing Assets

On July 13, 2015 we executed a lease with a new tenant in our Raleigh, North Carolina property to occupy 86,886 square feet, representing 75.0% of the total square footage. The current tenant retained 18.0% of the space. Therefore, the building is approximately 93.0% occupied. The lease commenced on August 1, 2015 and will expire on December 31, 2027. The new lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $0.5 million. The lease grants the tenant two extension options for an additional five years each. In connection with the execution of the lease, we provided $0.8 million in tenant improvements and $0.4 million in leasing commissions.

 

On August 28, 2015 we modified a lease with one of our tenants in our multi-tenant Indianapolis, Indiana property. The tenant, which previously occupied 4,512 square feet, increased its square footage to 6,903 square feet and extended their lease term an additional 3 years through September 2021. The original lease term would have expired in October 2018. This lease contains prescribed rent escalations over its life with annualized straight line rents of approximately $0.1 million, a $0.03 million increase over the previous lease. In connection with the extension of the lease and modification of certain of its terms, we provided $0.06 million in tenant improvements.

On September 18, 2015 we executed a lease with a tenant to occupy a portion of our previously vacant property located in Baytown, Texas. The lease is for 57.0% of the building, and is for a seven year term. The lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $0.13 million. The tenant has two options to renew the lease for an additional period of five years each. In connection with the execution of the lease, we provided $0.2 million in tenant improvements and $0.06 million in leasing commissions.

2014 Real Estate Activity

During the nine months ended September 30, 2014, we acquired eight properties, which are summarized in the table below (dollars in thousands):

 

										Lease						Total Purchase				Acquisition				Annualized Straight				Debt Issued &
Location		Acquisition Date				Square Footage				Term		Renewal Options				Price				Expenses				Line Rent				Assumed
Allen, TX			3/27/2014				21,154			12 Years			4 (5 years each)			$	5,525			$	33			$	570			$	3,481
Colleyville, TX			3/27/2014				20,355			12 Years			4 (5 years each)				4,523				33				467				2,849
Rancho Cordova, CA (4)			4/22/2014				61,358			10 Years			1 (5 year)				8,225				73				902				4,935
Coppell, TX			5/8/2014				21,171			12 Years			4 (5 years each)				5,838				26				601				3,816
Columbus, OH			5/13/2014				114,786			9.5 Years (1)			N/A	(1)			11,800				70				1,278	(3)			N/A
Taylor, PA			6/9/2014				955,935			10 Years			4 (5 years each)				39,000				730				3,400				22,600
Aurora, CO			7/1/2014				124,800			15 Years			2 (5 years each)				8,300				91				768				N/A
Indianapolis, IN (4)			9/3/2014				86,495			11.5 Years (2)			2 (5 years each)	(2)			10,500				58				1,504	(3)			6,100
Total							1,406,054									$	93,711			$	1,114			$	9,490			$	43,781

 

(1)	Lease term and renewal options are reflective of the largest tenant. The smaller tenant’s lease terminates in November 2016 and contains no renewal options.

(2)	Lease term and renewal options are reflective of the largest tenant. The other tenants in the building have varying lease expirations from December 2015 to October 2018. No other tenants have renewal options.

(3)	Rent figure is reflective of aggregate rent among all tenants occupying the building.

(4)	Tenants occupying these properties are subject to a gross lease.

In accordance with ASC 805, we determined the fair value of the acquired assets related to the eight properties acquired during the nine months ended September 30, 2014 as follows (in thousands):

 

										Tenant				In-place								Customer				Above Market				Below Market				Premium on				Total Purchase
		Land				Building				Improvements				Leases				Leasing Costs				Relationships				Leases				Leases				Assumed Debt				Price
Allen, TX		$	874			$	3,509			$	125			$	598			$	273			$	218			$	—			$	—			$	(72	)		$	5,525
Colleyville, TX			1,277				2,307				117				486				220				181				—				(6	)			(59	)			4,523
Rancho Cordova, CA			752				5,898				278				473				546				278				—				—				—				8,225
Coppell, TX			1,448				3,221				128				636				293				230				—				—				(118	)			5,838
Columbus, OH			990				6,080				1,937				823				719				990				261				—				—				11,800
Taylor, PA			3,102				24,449				956				6,171				1,452				2,870				—				—				—				39,000
Aurora, CO			2,882				3,825				92				413				806				282				—				—				—				8,300
Indianapolis, IN			502				5,334				1,088				1,990				741				732				126				(13	)			—				10,500
		$	11,827			$	54,623			$	4,721			$	11,590			$	5,050			$	5,781			$	387			$	(19	)		$	(249	)		$	93,711

 

Below is a summary of the total revenue and earnings recognized on the eight properties acquired during the three and nine months ended September 30, 2014 (dollars in thousands):

 

						For the three months ended September 30,								For the nine months ended September 30,
						2014								2014
Location		Acquisition Date				Rental Revenue				Earnings (1)				Rental Revenue				Earnings (1)
Allen, TX			3/27/2014			$	143			$	101			$	293			$	167
Colleyville, TX			3/27/2014				117				83				240				138
Rancho Cordova, CA			4/22/2014				226				104				399				168
Coppell, TX			5/8/2014				150				116				239				139
Columbus, OH (2)			5/13/2014				311				115				479				184
Taylor, PA			6/9/2014				850				395				1,058				493
Aurora, CO			7/1/2014				192				124				192				124
Indianapolis, IN (2)			9/3/2014				116				9				116				9
						$	2,105			$	1,047			$	3,016			$	1,422

 

(1)	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

(2)	Rental revenue and earnings is reflective of aggregate rent and operating expenses among all tenants occupying the building.

Intangible Assets

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of September 30, 2015 and December 31, 2014 respectively (in thousands):

 

		September 30, 2015 (1)								December 31, 2014
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	65,642			$	(21,198	)		$	59,233			$	(17,379	)
Leasing costs			42,936				(13,803	)			38,305				(11,411	)
Customer relationships			46,230				(13,844	)			41,243				(11,177	)
		$	154,808			$	(48,845	)		$	138,781			$	(39,967	)
		Deferred Rent Receivable/(Liability)				Accumulated Amortization				Deferred Rent Receivable/(Liability)				Accumulated Amortization
Above market leases		$	9,591			$	(6,307	)		$	8,314			$	(6,384	)
Below market leases			16,946				(7,932	)			15,939				(7,345	)
		$	26,537			$	(14,239	)		$	24,253			$	(13,729	)
Total		$	181,345			$	(63,084	)		$	163,034			$	(53,696	)

 

(1)	Does not include real estate held for sale as of September 30, 2015.

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $3.3 million and $9.7 million for the three and nine months ended September 30, 2015, respectively, and $2.6 million and $7.3 million for the three and nine months ended September 30, 2014, respectively, and is included in depreciation and amortization expense in the condensed consolidated statement of operations.

 

Total amortization related to above-market lease values was $0.1 million and $0.3 million for the three and nine months ended September 30, 2015, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2014, respectively. Total amortization related to below-market lease values was $0.2 million and $0.7 million for the three and nine months ended September 30, 2015, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2014, respectively.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2015 and 2014, respectively, were as follows:

 

Intangible Assets & Liabilities		2015				2014
In-place leases			11.5				10.2
Leasing costs			11.5				10.2
Customer relationships			16.1				14.6
Above market leases			17.2				9.3
Below market leases			13.5				9.9
All intangible assets & liabilities			12.9				11.5